Recover unpaid bills by claiming bad debt

I used to think all debt was bad.

Then I started a business and didn’t get paid by a customer. That’s when I learned about bad debt.

A bad debt occurs when you determine an amount due to your business is uncollectable. You’ve supplied a service or product to a customer, and you’ve sent him an invoice. But he hasn’t paid up.

Some customers just don’ t bother paying their bills. In an extreme case, a customer’s business went bankrupt and he’s unable to pay the invoice.

You now write this amount off as a “bad debt” and it turns into an expense for your company.

It isn’t that easy, though. (It never is, is it?)

How to claim a bad debt

Before you can entertain the idea of claiming bad debt, you must establish the debt as uncollectible. The Canada Revenue Agency expects that you have used all legal avenues of collecting the debt, and/or the company that owes you money is insolvent.

If you are a sole proprietor or member of a partnership, total your bad debts for the taxation year and enter it on Line 8590 of your T-2125, Statement of Business or Professional Activities.

If you recover a bad debt in the taxation year, you have to claim it as income on Line 8230. It becomes taxable income.

If you run a corporation, you claim the total of bad debts on Line 304 of your T2 short form.

Here to help

A1 Accounting, a Calgary accounting and bookkeeping firm, is here to assist you with your taxes and planning. We specialize in personal taxes and small-business accounting and financial services. Contact one of our tax specialists and we can help you optimize the tax benefits and credits available to self-employed individuals and small businesses.

Fill out our contact form or give us a call at 403-226-8297.

Last chance for free business coaching

A few spots remain open at our two-hour workshop with Forzani Business Coaching’s Grant Basiuk. If you’re a small business owner in Calgary, you don’t want to miss this.

Grant will teach you how to watch your business scoreboard and use it to make better business decisions.

The free workshop runs Friday, November 29, from 9:30 to 11:30 a.m, at the Elks Lodge and Golf Club. Register early at Eventbrite.

You can also contact Grant to book a meeting.